Managerial Accounting – Pt. 1

One of my loves is managerial accounting.  How does this help small business?

In a nutshell, managerial accounting helps you plan for the future.  It starts with having a dream for the future.  Where do you want to be next year?  Three years?  Five years?  How are going to GET there?  Business plans are nice, in theory, but they change as the world, economy and market change.  Current wisdom says to ditch the business plan.

In a way, I support that.  I think you need a document focused on an annual budget or forecast to help guide you where you want to go.  Say you have set a goal to bring in $100,000 gross revenue this year.  If you bring in $100,000, you can plan how much to spend on advertising, on your utilities, and on your own pay.  Based around that, you can decide how many new clients that means.  Is that 10?  15?  Looking at your budget and creating an annual plan around that is much more flexible than a set-in-stone business plan.

Budgets are typically prepared about a year in advance.  When you set plans for longer out, you get into forecasting.  This is even more flexible.  Set up correctly, you can change one number (say adjusting sales up or down based on current activity) and all other numbers will pivot around that.  It can help you decide how fast you’re growing, and when to expand.

After creating a budget or forecast, you can use those numbers to create an implementation plan.  This guides your day-to-day activities, helping you plan staffing levels for anticipated peaks or slow-downs, or decide if you REALLY need to purchase that piece of equipment, sign that long-term lease, etc.

Next week I’ll look at the last two components of the accounting cycle in controlling your expenses.

 

 

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